"Comes a time when the blind man takes your hand says: Don't you see?" — Grateful Dead
Warren Buffett just decided he would play the role of the blind man and take the hand of the market.
On Monday, Buffett announced that he believes that Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) is undervalued.
"In the opinion of our Board and management, the underlying businesses of Berkshire are worth considerably more than this amount, though any such estimate is necessarily imprecise," he said in a statement.
It was simply too much that BRK.A shares were approaching tangible book value, not to mention a much smaller fraction of the intrinsic value of the company. Buffett has explained many times that he measures the progress of Berkshire by its steady gains in tangible equity; however, that tangible equity does not nearly represent the intrinsic value of the company. He has on occasion used the example of See's Candy to drive home this point.
Buffett initially paid in the neighborhood of $25 million for about $7 million in tangible assets for the company. Years later, the business would provide him year after year of pretax profits well in excess of the original purchase price. If we use tangible book value as the intrinsic guide to the net worth of Berkshire then businesses such as See's are worth no more than the sum of their assets; future cash flow is deemed meaningless. Such an approach works well when pricing bond portfolios, but it bears little meaningful data when one attempts to assess the value of a cash-producing business.
In his 2000 annual letter Buffett set the conditions in which he would consider buying back Berkshire stocks. The following quote from the letter (page 16) illuminates the situation perfectly:
“First, the company has available funds — cash plus sensible borrowing capacity — beyond the near-term needs of the business and, second, finds its stock selling in the market below its intrinsic value, conservatively-calculated.”
Berkshire has the necessary cash to fund the business and Buffett feels that the business is substantially undervalued up to 10% in excess of tangible book value. That percentage is the top amount in which Berkshire will pay to buy back its stock according to the announcement.
Although Buffett has vowed never to talk up the price of Berkshire stock, its seems that he is shouting "buy" with today's announcement. A stock buy back is the strongest endorsement that an aging Buffett could give to his beloved company, and it speaks volumes about his opinion of Berkshire's current market assessment.
Warren Buffett just decided he would play the role of the blind man and take the hand of the market.
On Monday, Buffett announced that he believes that Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) is undervalued.
"In the opinion of our Board and management, the underlying businesses of Berkshire are worth considerably more than this amount, though any such estimate is necessarily imprecise," he said in a statement.
It was simply too much that BRK.A shares were approaching tangible book value, not to mention a much smaller fraction of the intrinsic value of the company. Buffett has explained many times that he measures the progress of Berkshire by its steady gains in tangible equity; however, that tangible equity does not nearly represent the intrinsic value of the company. He has on occasion used the example of See's Candy to drive home this point.
Buffett initially paid in the neighborhood of $25 million for about $7 million in tangible assets for the company. Years later, the business would provide him year after year of pretax profits well in excess of the original purchase price. If we use tangible book value as the intrinsic guide to the net worth of Berkshire then businesses such as See's are worth no more than the sum of their assets; future cash flow is deemed meaningless. Such an approach works well when pricing bond portfolios, but it bears little meaningful data when one attempts to assess the value of a cash-producing business.
In his 2000 annual letter Buffett set the conditions in which he would consider buying back Berkshire stocks. The following quote from the letter (page 16) illuminates the situation perfectly:
“First, the company has available funds — cash plus sensible borrowing capacity — beyond the near-term needs of the business and, second, finds its stock selling in the market below its intrinsic value, conservatively-calculated.”
Berkshire has the necessary cash to fund the business and Buffett feels that the business is substantially undervalued up to 10% in excess of tangible book value. That percentage is the top amount in which Berkshire will pay to buy back its stock according to the announcement.
Although Buffett has vowed never to talk up the price of Berkshire stock, its seems that he is shouting "buy" with today's announcement. A stock buy back is the strongest endorsement that an aging Buffett could give to his beloved company, and it speaks volumes about his opinion of Berkshire's current market assessment.
